Acacia Research Corporation

Good morning, ladies and gentlemen, and thank you for joining us for Acacia Research third quarter 2024 earnings conference call. My name is Jenny and I'll be your conference facilitator today. All lines are currently on mute to prevent any background noise. I would like to remind you that this conference is being recorded today and is also available through audio webcast on Acacia's website. Following the speaker's remarks, there will be time for questions. Questions can also be directed to Acacia at IR at AcaciaRes, which is A-C-A-C-I-A-R-E-S dot com. I would now like to turn the conference over to Mr. Brent Anderson of Garnier Communications. Mr. Anderson, you may begin the conference.

Thank you, Operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer, and Kirsten Hoover, Acacia's Interim Chief Financial Officer. Before MJ and Kirsten begin their prepared remarks, please be reminded that information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts, and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives, and expectations for future operation and are based on the current estimates and projections, future results, or trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors described in Acacia's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. Acacia issued a press release disclosing its third quarter financial results earlier this morning. The press release may be accessed on the company's website under the Press Releases section of the Investor Relations tab at AcaciaResearch.com. The company also posted its Q3 2024 earnings presentation to its website, each of which can be found under the events and presentations tab. I would now like to turn the call over to Acacia's Chief Executive Officer, MJ McNulty.

Thanks, Brett. And thanks to everyone for joining us today for our third quarter earnings call. As many of you have heard me say, Acacia is a value-oriented acquirer and operator of businesses across the industrial, energy, and technology sectors. Specifically, we're focused on acquiring and building companies that have stable cash flow generation with an ability to scale while retaining the flexibility to make opportunistic acquisitions with higher risk-adjusted return characteristics. With that in mind, I'd like to begin our call today by talking about our investment strategy and how Deflecto, the newest addition to our stable of companies, fits our strategy to a T. After significant due diligence, negotiation, and strategic planning, we signed and simultaneously closed on our purchase of Deflecto late last month. This transaction, like our acquisition of Benchmark almost a year ago, came about through adhering closely to our philosophy of building strong and like-minded relationships with business leaders, and importantly, finding opportunities to make our return owning a business rather than through selling a business. I'd like to drill down a bit on that last point because I think it's one of the key elements that differentiates us from others. We run several valuation models and metrics when we evaluate a business. One metric we rely heavily on is the durability and scalability of a target's annual earnings stream rather than its exit earnings. and the impact of these earnings on our income statement. Specifically, we underwrite to an acceptable range of unlevered and levered earnings yields relative to the purchase price of the business and the related equity required to fund the acquisition. So why is this different? It's distinct from the, quote, leveraged buyout level, where the purchase price is heavily financed through a credit package, enabling small enhancements to earnings and potential valuation multiple expansion to generate returns. Both models work, as private equity has shown. However, in the private equity model, the gains are heavily back-weighted and thus carry a higher discount rate and incremental leverage risk. Our model instead targets similar returns without requiring an exit event for the business to generate those returns. So when we acquire a business at a, quote, good multiple, it means we believe we're acquiring an attractive earnings stream relative to the price we paid to acquire that business And we believe there's an inherent valuation benefit relative to where similarly situated assets might trade in the market. As I've mentioned in the past, we approach our acquisitions as long-term owners, though in our evaluation of capital allocation opportunities, we may from time to time sell a business we own. I'd be remiss if I didn't also mention, as part of our operating philosophy, that we endeavor through our strong network of operating partners to enhance the values of the businesses we acquire. driving both the ability to generate incremental earnings, potentially enhancing the company's valuations. The Deflecto acquisition was our third acquisition in the last 12 months, with two on our energy vertical and one on our industrials vertical. These acquisitions have brought enhanced scale to our business, and we continue to evaluate new platforms specifically for our technology vertical. Within each of our platforms, we believe there are several attractive organic growth and margin opportunities, as well as the opportunity to be a strategic acquirer and consolidate within their respective industries. Simply put, we buy businesses and create platforms. We grow them organically and through M&A with a clear focus on free cash flow generation and defined expectations on return on invested capital. We then have the optionality to grow and reinvest free cash flow or look to monetize and build new platforms. You can see this in our recent acquisitions of Deflecto and Benchmark. Moving to Deflecto. Deflecto is a leading specialty manufacturer of essential products serving the commercial transportation, HVAC, and office markets. This acquisition is a fantastic addition to our growing portfolio of strategic assets. Deflecto is a market leader across each of its segments and markets, and the acquisition is aligned with our long-term strategy. The business fits within our target size range, sells diversified and, in many cases, regulatorily mandated products, and has a strong capital allocation focus. We're thrilled to be partnering with the Deflecto team, and I'm excited by Deflecto's strong growth potential. I believe it has attractive near and long-term value creation opportunities through product and operational optimization, as well as strategic M&A. As you'll see in our earnings supplement, we purchased 100% of Deflecto for $103.7 million. This included $48 million in debt financing and $55.7 million in equity for Acacia's balance sheet. We anticipate Deflecto to generate revenues in the range of $128 to $136 million, and $17.5 to $19.5 million in EBITDA for 2024. The company has moderate capital needs, a diversified customer and supplier base, and has substantial market share in each one of its operating businesses. I'd very much like to acknowledge the tremendous amount of work our team has done this past year to successfully complete the two benchmark transactions and the acquisition of Deflecta. I'm extremely grateful and humbled to work with such a dedicated team. Turning now to earnings. In our ongoing effort to provide shareholders in the market with greater visibility into the financial strength of our core verticals, this quarter we disclosed operated segment adjusted EBITDA as part of our filings. We believe these adjusted results are more representative of the underlying earnings power of the businesses and should help our investors normalize for certain factors, including non-cash amortization expenses, mark-to-market accounting of benchmarks hedge book and public securities, and certain non-recurring corporate level expenses. The key takeaways for this quarter are that our operated segment adjusted EBITDA, which has yet to include our acquisition of Deflecto, continues to grow. IP, which we've mentioned in the past, is periodic, and that we are managing our parent costs well, while we largely offset those costs with interest income generated on our cash balances. I'm pleased with the team's efforts to diligently manage our parent level costs which have generally been consistent, although up a bit this quarter because of increased accounting costs due to the growth in the company. It's a nice challenge to have. Kirsten will go into this in more detail, but briefly, our third quarter results reflect our unwavering focus on value creation through our technology, energy, and industrial verticals. The company generated $23.3 million in consolidated revenue from the quarter. up 131% compared to the third quarter of last year, driven by the full quarter impact of the recent benchmark acquisition, but off slightly compared to the $25.8 million generated in Q2 due to lower intellectual property revenue, which we mentioned earlier. It comes in periodically. The company also generated $1.7 million of adjusted EBITDA in the third quarter and $12.1 million in the nine months ended September, driven by $6.9 million and $26.1 million and operated segment adjusted EBITDA, and $9 million and $19.8 million in operated segment adjusted EBITDA, excluding IP operations to normalize the volatility. Parent costs for the three and nine months ended September 30th were $5.2 million and $14 million, respectively, which are largely offset by $4.6 million and $14.3 million. 7 million of corporate interest income respectively. Diving into the business verticals, our energy operations generated 15.8 million in revenues during the quarter, up 12% from 14.2 million in the second quarter, reflecting the benefit of the full quarter impact of Benchmark's April acquisition. As a reminder, our energy operations revenue number excludes the impact of realized hedge gains, which is included in other income. Our industrials operation generated $7 million in revenues, up 11% from $6.3 million in the second quarter due to an increase in printer and consumable sales. Our intellectual property operations delivered half a million dollars in revenue during the third quarter, down $5.3 million from the prior quarter due to no paid-up licensing agreements executed this quarter. For the three and nine months ended September 30th, Acacia's energy operations generated adjusted EBITDA of $8.4 million and $16.9 million. Our industrial operations generated half a million dollars and $2.9 million, and our intellectual property generated an EBITDA loss of $2.1 million and an EBITDA gain of $6.3 million. Book value per share remains a primary metric on which our team's compensation is based and aligns management's and shareholders' interests at this stage in our company life. Our book value per share on September 30th was $5.85 per share compared to $5.95 per share at June 30th, excluding the impact of accruals and expenses of $14.9 million related to non-recurring legacy legal matters. The company's book value per share on September 30th would have been $6 per share. I'll dive deeper into each of our verticals in just a moment, but before I do, I want to highlight one metric that illustrates Acacia's financial health and reinforces the strength of our business plan. Although we've completed three acquisitions in the last 12 months, we've successfully grown the company's current cash position to approximately $280 million. compared to $242 million as of September 30th, 2022, demonstrating the company's robust financial capacity. And we look forward to further cash growth as we incorporate deflecto earnings into our business starting in the fourth quarter. Turning now to our energy program. As you know, in November of 2023, Acacia acquired a majority stake in Benchmark Energy, an independent oil and gas company that acquires, produces, and develops oil and gas assets in Texas and Oklahoma. This past April, Benchmark acquired certain liquids-rich, predominantly oil-based, low-decline upstream assets and related facilities in the western Antidraco Basin. Acacia now owns 73.5% of Benchmark Energy following its most recent acquisition. Our energy operations consist of over 150,000 net acres and over 500 operated wells producing approximately 6,000 barrels of oil equivalent per day throughout the Texas Panhandle and Western Oklahoma. Benchmark is focused on acquiring predictable cash flow through shallow decline oil and gas properties with minimal capital intensity that can be enhanced through field optimizations and risk managed through robust commodity hedges and low leverage. During the third quarter, Benchmark's management team continued implementing operational improvements, including artificial lift optimization, active well maintenance, and the reopening of previously closed wells to take advantage of the under-managed assets we acquired. As a result, our energy vertical delivered consolidated revenues of $15.8 million and adjusted EBITDA of $8.4 million in the third quarter, driven in part by our the hedge book, which protects approximately 70% of our operated net oil and gas production over the next three years. I know that we have adjusted EBITDA for the impact of realized hedging gains, but they are not included in the quarter's top line revenue figure. For those of you wondering, we disclose the realized versus unrealized component of our hedges to help investors better understand the cash impact our hedge book has on the enterprise. This information can be found in our regulatory file. Turning now to our technology vertical. We wanted to take the opportunity to provide a little more color on our IP business. While it's becoming a less meaningful part of the business as we grow through acquisition, we continue to view it as an attractive set of assets. We operate our IP business through our wholly-owned subsidiary, Acacia Research Group, LLC, and its wholly-owned subsidiaries. We are a principal in the licensing and enforcement of patent portfolios with our operating subsidiaries obtaining the rights in the patent portfolios or purchasing them outright. On a consolidated basis, we currently own or control the rights to multiple patent portfolios, including U.S. patents and certain foreign counterparts, which cover technologies used in a wide variety of industries. We generate revenues and related cash flow from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or own. While we partner from time to time with inventors and patent owners ranging in size and including large corporations, we control and assume all responsibility in pursuing patent licensing and enforcement programs and for the related operating expenses. When applicable, we share licensing revenue, that of the costs, with our patent partners after we have achieved our agreed-upon minimum return threshold. We may also provide upfront capital to patent owners as an advance against future licensing revenue. Our current active patent portfolios include Atlas Technologies, which covers Wi-Fi 6 standards essential patents, Unification Technologies, which covers flash memory technology, Mana Networking Technologies, which covers IP networking, Stingray IP Solutions, which covers wireless networking, and R2 Solutions, which covers internet search, advertising, and cloud computing technology. We're often asked to provide updates on these monetization efforts, including our litigation activities. However, as you can appreciate, we can only disclose publicly available information. For example, Regarding TP link, I can confirm that following the September two thousand twenty three. Judgment for thirty seven point four million dollars against TP link. Their post trial motions were denied and they filed an appeal with the federal circuit in October of this year. We anticipate briefings will be filed between now and February of next year with a decision anticipated in the second half of two thousand twenty five. Interest on the $37 million judgment continues to accrue at the monthly UST building. With respect to our private negotiations and licensing campaigns, as you can appreciate, we're not able to disclose any information. As attractive opportunities become available, we remain open to opportunistically deploying additional capital into the IP business in the future, consistent with our mission to maximize value for shareholders. Our team are well-respected leaders in the IP space, and intellectual property owners actively seek us out as a partner. Turning now to our industrials business. We're pleased with the progress of Printronics as it transitions its business mix from lower-margin printer sales to higher-margin consumable products, including ink cartridges and specialty rivets. We believe this dual hardware and consumables model, combined with a streamlined operating structure, represents a nice source of cash flow for Acacia. I'm also pleased with the turnaround work the Printronics team continues to undertake, including a key focus on top line initiatives and reducing G&A. And we expect Printronics to continue to generate free cash flow on an annual basis. Printronics generated $7 million in revenue during the quarter compared to $6.3 million in the prior quarter and $8.3 million in the third quarter of last year. And briefly, While not a core vertical for us, I'd like to highlight that Acacia's remaining life sciences portfolio net of non-controlling interest represented $25.7 million in book value on September 30th. Acacia holds interest in three private companies, including an approximate 26% interest in Biomet Pharmaceuticals, an approximately 18% interest in AMO Pharma, and an approximately 4% interest in Novabiotics. We continue to actively and diligently seek opportunities to maximize the value for our life sciences assets for our shareholders. I'd now like to turn the call over to Kirsten to discuss our third quarter financial results.